Transcript
Speaker: This is HSBC Global Viewpoint, your window into the thinking, trends and issues shaping global banking and markets.
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Speaker: Thank you for listening.
Speaker: You're listening to the HSBC Global Research Macro Viewpoint, a roundup of our key reports published over the past week by our team of economists and strategists.
Speaker: Hello, Anna.
Speaker: Happy New Year to all our listeners.
Speaker: Coming up on today's podcast, we map out the direction of central bank policy in the face of growing concerns over high inflation.
Speaker: We get the latest on the global natural gas crunch amid continued high prices.
Speaker: And we assess the prospects for emerging market assets following a tough 2021.
Speaker: This podcast was recorded on Thursday the 13th of January 2022.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: Hello, I'm Piers Butler.
Speaker: And I'm Aline Van Dyne.
Speaker: We begin this week with a look at the global economy.
Speaker: Despite uncertainties about the growth outlook, inflation is clearly now a bigger concern for central banks, not least the Fed.
Speaker: For more on that, I'm joined by Janet Henry, our global chief economist.
Speaker: Janet, we've started 2022 with a number of inflation prints that have been quite high.
Speaker: Yes, that's right, Aileen.
Speaker: In the last week, we've had, well, a very high inflation print out of the US at 7%.
Speaker: For once, it wasn't higher than expected.
Speaker: It was just high.
Speaker: It was at a 40-year high.
Speaker: And we also saw a jump in core inflation to 5.5%.
Speaker: But actually, at the end of last week, we had Eurozone inflation for December also,
Speaker: And that had been expected to fall back.
Speaker: But actually, it rose further to 5%.
Speaker: Because while the energy component did start to ease the surprise this time came from food prices in the eurozone, really, China still the major outlier.
Speaker: Chinese inflation, which came out on the same day as that US release,
Speaker: actually fell back.
Speaker: China's seen the same surge in producer price inflation that's been evident globally.
Speaker: But actually, Chinese consumer price inflation slowed from 2.3 to 1.5%.
Speaker: And where do you think we go from here?
Speaker: Well, I think as far as the numbers are concerned, US inflation should probably peak maybe in January based on what we're seeing with commodity prices.
Speaker: It's possible it edges a little bit higher.
Speaker: But core inflation, we think, will continue to rise at least through the first quarter onwards.
Speaker: of 2022, because of partly the rotation from goods related to service sector spending, and in particular for the housing component.
Speaker: This tends to feed through with something of a lag, but we did see some some some bigger increases in rental prices coming through.
Speaker: And then after around kind of March, April time, inflation should gradually
Speaker: start to ease lower.
Speaker: But of course, it really depends on what's happened to inflation expectations, and how much of a wage response we actually start to come through.
Speaker: And of course, whether these supply strains, which may be exacerbated by the Omicron variant and what's happening with COVID-19 globally,
Speaker: whether that exacerbates the situation.
Speaker: In the eurozone, we see inflation falling back a bit more swiftly.
Speaker: It should even start to fall back in January, given some base effects that should be kicking in.
Speaker: Given all this and given all this uncertainty, how do central banks react?
Speaker: And of course, the Fed in particular is in the spotlight.
Speaker: Well, central banks have been to some degree reacting differently over the last year.
Speaker: For much of 2021, we saw a lot of the emerging economies, particularly in Latin America and Semia, not in Asia, actually raise in places interest rates quite aggressively.
Speaker: But the definite shift in recent months has, of course, been the Fed.
Speaker: And that has continued at the start of 2022, when we had the testimony at his confirmation hearing from Fed Chair Jerome Powell,
Speaker: when he reiterated, I suppose, this growing market expectation that the Fed's policy approach has now shifted.
Speaker: Yes, they have a dual mandate for growth and inflation, but inflation is now the dominant concern.
Speaker: it's now potentially a question of their own credibility.
Speaker: They not only need to talk about being willing to take action, but show that they are willing to take action.
Speaker: So at the Fed meeting, they're likely to confirm what is now a market expectation that they'll be gradually raising interest rates through the course of 2022.
Speaker: And also not only having halted their asset purchases, but beginning to shrink the size of their extremely large balance sheet.
Speaker: Janet, thanks for the latest update.
Speaker: Thanks, Aline.
Speaker: Janet discussed higher prices there, and in energy markets, there's no end in sight for the global natural gas crunch.
Speaker: Kim Foustier, oil and gas analyst, has been looking at where we go from here.
Speaker: So, Kim, this gas crunch is continuing.
Speaker: Bring us up to date on what's been happening.
Speaker: Sure, so just to kind of set the scene, you'll recall that gas prices tripled or quadrupled or something like that in the third quarter to record levels.
Speaker: And that was actually before winter started.
Speaker: But more recently in the past month, the forward curve for 2022 has shot up again.
Speaker: I think what's really crucial is that it doesn't show
Speaker: much of a decrease at all in prices in the spring and summer.
Speaker: Now, that would normally be the case because gas demand tends to drop off materially after the end of the heating season.
Speaker: So basically, the market has given up hope of seeing any additional gas supplies coming to Europe this year.
Speaker: And therefore, the earliest we can expect any relief at all is perhaps 2023.
Speaker: You talked about supply, but what about on the demand side?
Speaker: I think one of the big factors that explain the current gas crunch is just how strong gas demand has been, particularly in Asia.
Speaker: Obviously, gas is being used as a transition fuel.
Speaker: A number of Asian countries are
Speaker: switching away from coal into gas.
Speaker: And then when you look at Europe, well, gas demand in Europe is not really declining yet, despite, you know, gas's uncertain status there as a transition fuel for reasons including nuclear phase-outs in places like Germany.
Speaker: And Europe is at the epicentre of this gas crunch.
Speaker: Why is that?
Speaker: It's fair to say that Europe has been squeezed harder than any of the regions like Asia because Europe draws more of its gas from the spot market and from the spot LNG market.
Speaker: The other reason is that it's very dependent on Russian gas exports.
Speaker: Russia represents about one third of European gas supply and Russian exports to Europe have continued to disappoint in the last couple of months, even after Russia finished refilling its own domestic inventories.
Speaker: So that leaves Europe really dependent on the startup of the Nord Stream 2 pipeline, which will take gas directly from the Russian border to the German border and bypass Ukraine.
Speaker: We think that that pipeline is unlikely to start up before this autumn.
Speaker: So it is not going to be there to help during this winter, and it is not going to be there to help Europe replenish its inventories this summer.
Speaker: And that's really why we think forward prices have shot up.
Speaker: What about liquid natural gas, LNG?
Speaker: Could that alleviate the situation?
Speaker: That's a good question.
Speaker: One of the reasons is just how strong Asian LNG demand has been.
Speaker: So Europe has been forced to compete with Asia for those LNG cargoes.
Speaker: On top of that, we have seen lots of LNG outages last year.
Speaker: We hope those will abate into 2022.
Speaker: But really, any normalization is far from assured because the global LNG market should remain tight for a number of years.
Speaker: If you look at new supplies coming on stream, there's actually not that much.
Speaker: coming on before 2025 or 2026.
Speaker: And a lot of that will be absorbed by Asia.
Speaker: And so really the best case scenario for how this all ends is for Europe to have a mild winter, then for Nord Stream 2 to come online in September.
Speaker: And then we need no further LNG outages and no other bad surprises.
Speaker: And if all of these factors align, then perhaps the crunch could start to alleviate in part next year and then into 2024.
Speaker: But that's really a best case scenario.
Speaker: So it sounds like we should all be keeping our fingers crossed.
Speaker: Kim, thanks for joining us.
Speaker: Thank you.
Speaker: Thanks for having me.
Speaker: Emerging markets suffered a tough 2021 with most assets underperforming their developed market peers.
Speaker: Murat Olgan, our global head of emerging markets research, has been looking at whether the outlook is more positive this year.
Speaker: Murat, let's start with a quick overview of where we stand now at the beginning of 2022.
Speaker: Yes, so most of the challenges from last year are still intact.
Speaker: We have an increasingly hawkish Federal Reserve.
Speaker: There is no major uplift from China.
Speaker: A bleak growth outlook.
Speaker: Pandemic is still a problem.
Speaker: Emerging markets underperform developed markets on vaccine rollout.
Speaker: Most economies are facing enormous cost side price pressures, which are spilling over to consumer inflation and keeping inflation.
Speaker: The center banks on a whole cash flow thing.
Speaker: So we have a weak cycle and a retreating global liquidity backdrop, which forms a challenging environment for emerging markets.
Speaker: And of all those challenges, which ones are the ones to really focus on in 2022?
Speaker: To be honest, none of these challenges are new.
Speaker: And markets have been pricing in this so-called stack relationary backdrop for a while.
Speaker: I mean, there is still lots of interest rates I expected from emerging market economies.
Speaker: Emerging market equities have underperformed their developed world counterparts.
Speaker: Investors have reduced their local debt positions.
Speaker: They've increased their cash holdings.
Speaker: So it's a favorable technical picture.
Speaker: And we think markets are probably more sensitive to upside or positive surprises.
Speaker: So, Mourad, what are some of the possible catalysts then for a positive reaction in emerging markets?
Speaker: Because assets across the board ended with a fairly poor performance in 2021.
Speaker: That's correct.
Speaker: I think, you know, given the sensitivity to upside surprises, we can think of some scenarios like maybe there will be positive developments with regards to the path of the pandemic.
Speaker: The supply chain strains could ease and there are already some tentative signs that the worst could be over.
Speaker: And we are already seeing some turning around in high input cost pressure that are getting a little bit less, still elevated, but moderating a bit.
Speaker: There could be a stronger growth outlook in China now that authorities are more focused on supporting growth and inflation in the US and EM could peak finally after a few years.
Speaker: And this could all create some positive upside surprises.
Speaker: Are there any regional differences to highlight?
Speaker: Yes, there are.
Speaker: Definitely on the inflation side of things.
Speaker: We've seen a big pickup in inflation and still continued upside surprises across EMEA and Latin America, whereas the inflation trajectory has been a lot milder across Asia.
Speaker: Yes, there are a few upside surprises recently.
Speaker: It is picking up a bit, but not to the extent we've seen elsewhere.
Speaker: It's still quite a soft trajectory.
Speaker: And with that, there could be fewer rate hikes across the region.
Speaker: If anything, actually, China is supporting its economy through some loosening of monetary policy, and our economists are looking for some rate cuts.
Speaker: So yes, there is a big divergence when it comes to inflation outlook and monetary policy between Asia and the rest of the EM regions.
Speaker: Murad, thank you so much.
Speaker: Thank you very much.
Speaker: So that wraps things up for us today.
Speaker: Thank you to our guests, Janet Henry, Kim Fustier and Murad Organ.
Speaker: From all of us here, thanks for listening.
Speaker: We'll be back again next week.
Speaker: Thank you for listening today.
Speaker: This has been HSBC Global Viewpoint Banking and Markets.
Speaker: For more information about anything you heard in this podcast or to learn about HSBC's global services and offerings, please visit gbm.hsbc.com.
